Question

Menlo Company distributes a single product. The company’s sales and expenses for last month follow:

	Total			Per Unit
Sales	$	600,000		$	40
Variable expenses		420,000			28
Contribution margin		180,000		$	12
Fixed expenses		148,800
Net operating income	$	31,200

Required:
1.	What is the monthly break-even point in unit sales and in dollar sales?

        

2.	Without resorting to computations, what is the total contribution margin at the break-even point?

        

3-a.	How many units would have to be sold each month to earn a target profit of $60,000? Use the formula method.

        

3-b.	Verify your answer by preparing a contribution format income statement at the target sales level.

         

4.	Refer to the original data. Compute the company's margin of safety in both dollar and percentage terms. Round your percentage answer to 2 decimal places (i.e .1234 should be entered as 12.34).

        

5.	What is the company’s CM ratio? If monthly sales increase by $57,000 and there is no change in fixed expenses, by how much would you expect monthly net operating income to increase?

        

Answer 1

1) Break even unit = 148800/12 = 12400 Units

Break even sales = 12400*40 = $496000

2) Total Contribution margin at break even = Fixed cost = $148800

3a) Required unit = (148800+60000)/12 = 17400 Units

3b) Contribution margin income statement

	Total	Per unit
Sales	696000	40
Variable cost	487200	28
Contribution margin	208800	12
Fixed cost	148800
Net income	60000

4) Margin of safety (dollars) = 600000-496000 = 104000

Margin of safety (%) = 104000/600000 = 17.33%

5) CM ratio = 12/40 = 30%

Net operating income increase = 57000*30% = 17100